Why now: the 4 compulsions behind our recent reforms surge

Why now? From diplomats and tourists to businessmen and neighbours, that’s the refrain I hear. What was the need for Prime Minister Manmohan Singh to stake his government, his reputation and increase prices of everyday items, from gas cylinders to diesel? What went behind the sudden burst of reforms, from opening up multi-brand retail and civil aviation to foreign direct investment (in the latter case allowing foreign airlines to invest in domestic airlines) to sending signals to foreign investors that they will be treated fairly (taming the killer retrospective tax imposed on Vodafone, for instance)? The answer to “why now” is not really a new-found love for economic reforms the UPA government discovered last week, but the merging of four compulsions.

First, fiscal deficit — the notion that a government can spend as much as it likes on itself and on vote-buying social sector schemes (and not capital investment like roads and infrastructure) by borrowing money and splashing it all over is ending. It’s not that the problems of subsidy-catalysed deficit were not visible earlier — Budget after Budget has articulated the problem. Its implications were clear to all, as was the dire need to fix it. Rating agencies had warned in their outlooks that if the government did not get its fiscal act together, they would be forced to bring India to junk status. Which means the investment-grade restrictions on most global investors would come into play, stopping the flow of dollars into India. This would push the rupee to below 75 to the dollar, creating a self-perpetuating downward spiral.

Second, as India imports 80% of its growing energy needs, this crash of the Rupee would push our import bill out of control, compounding the already high prices of crude. To have any meaningful discussion on economic development without keeping energy needs in mind is meaningless. Like it or not, but led by the world’s most powerful and best organised cartel of OPEC (Organisation of Petroleum Exporting Countries), the artificially-manipulated prices of crude oil are not in India’s control. We have to accept them, grin and get on with our economic lives. This is where the fiscal crisis of 1991 is different from that of 2012: apart from being about a government that has gone overboard with social sector schemes, the price of crude oil has jumped — the average price in 1991 was around $20, today it’s around $110. Look at the pace of energy consumption, from government and industry to transporters and households and you know the gravity of this statistic.

Third, the danger of watching the much-celebrated demographics of India implode. The global growth driver dream — that a young India will drive economic growth like never before at a time when the developed world and China are supporting ageing populations in a 30-year-long domestic consumption cycle — is in danger of turning into a national security nightmare. For every percentage point of GDP growth that we compromise on, there are millions of jobs not created and as many aspirations smothered. This is not merely another set of numbers to be ignored — when pipelines of work shut down due to non-investment into projects by industry, a new pipeline of violent ideological action opens up to a huge chunk of unemployed young. And it is no longer restricted to the Maoist belt. This ideology is here, in urban India — the Maruti plant at Manesar, for instance.

And fourth, if despite all these compulsions, the government did not take controlling and rather unpopular measures — no government likes to see a high inflation or take measures to stoke it further at a time like we are in today -and India chooses to run over the fiscal cliff and call on the International Monetary Fund (IMF) to help get out of this crisis, another danger, so far articulated only in words and not on paper in the government, awaits. The control over IMF today lies in our neighbour China's hands. From the US to the EU, Asia to Latin America, all countries are in a financial mess. The sole exception is China, with which India has issues of trade and security. The conditions China would place on India would make 1991, when we had to sell our gold and reform our way out of the crisis, would look like a walk in the park. Reforms are necessary — but we have to deliver them because we need to and want to, not because a bully wants access to our strategic industries.